Subsidy plan draws ire from White House

Published: Saturday, November 06, 1999

WASHINGTON {AP} The Clinton administration is opposing a congressional change in the way interest rates are set in the nation's most common student loan programs, saying large private lenders like Sallie Mae could make millions from federal subsidies.

"The industry proposal would simply pass the spread risk from lenders to the taxpayers like a hot potato without investigating whether there are ways to eliminate it," Donald Feuerstein, an Education Department senior adviser on the issue, said Friday.

Private lenders beg to differ. The new proposal, approved in a larger unrelated bill last week, would save money because it protects lenders from huge losses, they said.

"It will stabilize private-sector programs, which produce loans that are cheaper for students," said Paul Carey, an executive vice president with Sallie Mae, the nation's largest issuer of student loans and a target of ire in the campaign against the subsidy changes.

The debate centers on a complex government subsidy system meant to attract private lenders to the $32 billion annual market that makes college loans to students. In addition to subsidizing private lenders, the government also makes about a third of these loans directly.

Private lenders have wanted the government to protect them from risk when interest rates are high by recalculating their subsidies to match the commercial markets in which they must borrow. And although such GOP-backed attempts have failed on their own, lawmakers last week were able to tuck the new formula into a popular bill that improves health-care insurance for disabled workers.

The plan changes the basis for the subsidy rate from the 3-month Treasury bill rate to the 3-month commercial paper rate.

The Clinton administration and other critics say the new rates in the subsidy plan could yield an extra $1.7 billion in profits for lenders over the life of new loans.

Administration estimates say a $692 million chunk of profit could go to Sallie Mae.

Clinton, who is said to be just as angry over the maneuver as the plan itself, has stopped short of a veto threat. But he is leading a multigroup letter-writing campaign to House and Senate members who are putting finishing touches on the companion bill.

"The proposal would do nothing to make loans more affordable to students while increasing the risks to the American taxpayers," wrote Stuart Eizenstat, deputy to Treasury Secretary Larry Summers.